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Private equity firms could see big return on Bats sale


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Private equity firms could see big return on Bats sale

Private equity investors sure look like they hit a home runon their investment in BatsGlobal Markets Inc. made through the bankruptcy.

The planned sale of Bats to promises to nearlydouble the value of the stake held by an investment partnership betweenSpectrum Equity ManagementLP and TA AssociatesManagement LP in less than a year. The ultimate return the privateequity firms receive on their investment in the exchange likely will be muchgreater than that.

Those two private equity firms in August 2013 their acquisition ofa minority stake in Bats from Lehman. Managing directors from the companieslauded the exchange's innovation, market efficiency, and "best-in-classsolutions" for domestic options and cash equities markets in the U.S. andEurope. One of Spectrum's managing directors, Chris Mitchell, joined the Batsboard.

In a September 2013 federal filing, Lehman Brothers noted collections of$274 million from private equity and principal investments, "including thesale of the company's investment in Bats Global Markets Inc."The filing does not specify the value of the Bats stake.

A little over a year before the PE firms announced theirinvestment in Bats, Lehman Brothers and other Bats shareholders contemplatedtaking the exchange public. At that time in late March 2012, Lehman's stake wasvalued at $71.6 million, based on the proposed maximum offering price outlinedin a securities filing.

Lehman ultimately sold its position in Bats, and theexchange went public three years later in an April 15 . A for the offeringlists Mitchell as a stakeholder with 16,498,551 shares held by BMG Holding LPand TA Associates Funds. That share count was unchanged after the offering, inwhich Bats' stock was priced at $19.00 per share. At that price, the value of theprivate equity partnership's stock ownership was nearly $313.5 million.

CBOE announced plans to acquire Bats for $32.50 per sharefive months later. That valuation would bring the value of the stake held bySpectrum and TA Associates to more than $536.2 million.

Since Bats went public, analysts have credited the companyas a low-cost disruptor in the exchange sector with healthy growth prospects innon-transaction revenue.

"With an asset light technology focus and headquartersin Kansas City, BATS has been able to operate like the of trading,"Jefferies analyst Daniel Fannon said in a May 10 note.

Sandler O'Neill analyst Rich Repetto said the exchange'sacquisitions brought in growth, diversification and tangible growthopportunities. The CBOE sale would be transformational to both companies,Repetto said after the deal announcement. CBOE would get an efficient tradingplatform, "able to build market share from scratch or through acquisitions,"he told clients in a Sept. 26 note.

Spectrum and TA Associates have in recent years allocatedcapital into technology-oriented companies ramping up growth. Spectrum's recentinvestments include a $28 million minority stake in do-it-yourself website builder Jimdoannounced in June 2015, and a 2014 investment in ExactBid, a company with a softwareplatform designed to connect financial institutions with local commercial realestate appraisers.

TA Associates lists technology, financial services, businessservices and healthcare as sectors in which it invests. The company announcedin February 2015 a deal to acquire a majority interest in wealth managementcompany NorthStar Financial Services Group LLC. In October 2015, TA Associatesagreed to buyFrank Russell Co.'sasset management business Russell Investments from .